Research Survey on Use of Opportunity Cost in Project Evaluation at Selected Commercial Banks in the Kingdom of Bahrain

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RESEARCH SURVEY ON USE OF OPPORTUNITY COST IN PROJECT EVALUATION AT SELECTED COMMERCIAL BANKS IN THE KINGDOM OF BAHRAIN

A RESEARCH PAPER

PRESENTED TO THE SCIENTIFIC RESEARCH AND DEVELOPMENT OFFICE

AMA INTERNATIONAL UNIVERSITY
KINGDOM OF BAHRAIN

BY

MUBEEN FATIMA

August, 2012

ABSTRACT

Accounting and Economics work for two different purposes. Today managerial decision making uses economics, as well as accounting concepts, methods & practices of scrutiny given by decision sciences. Literature shows that there are four basic tools and techniques of decision making used by economists, these are; augmentation, statistical valuation, projecting, numerical study, and game theory, most of which are equally procedural in nature they helps us to gather the idea of how decisions are made in economics.

Since resources are limited relative to wants, the usage of resources in one way hinders their use in other means. This implies the cost of opportunity, which is lost, is actually the profit of whose output is given up, this indicates that, lost time, satisfaction or any other benefit that provides usefulness should also be taken as opportunity cost.

Opportunity cost in literature is the cost referred as the next-best choice available to a rational consumer who has to select between a number of mutually distinct projects. It is, thus the key concept in economics. It has been illustrated as conveying "the basic relationship between deficiency and choice. Yet its relation to the economic profit is seldom discussed.

CHAPTER 1

INTRODUCTION

Background of the Study

Prior research work provides us the idea that opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. Being treated as a cost, opportunity cost had always been considered vital in calculation of the true cost of a project & has always effected a management accountant decision

However the modern economists, particularly the Austrian school of thought treats opportunity cost as something that has neither existence nor has any importance in decision making.

Though the field of economics gave birth to the concept of opportunity cost, the awareness about assessing the second best alternate is now taken over by management accounting, today this concept is being taught in academic graduate courses of economics however; in practice, the economists today emphasize on mathematical techniques in decision making there by ignoring various conceptual factors like opportunity costs and worth of projects being missed. Evaluating opportunity costs is important to find out the true cost of any project under consideration. If the financial worth of second best alternative of an investment project is low, then, overlooking that opportunity costs, gives an impression that benefits of next best alternative, cost practically nothing. The invisible opportunity costs then become one of the hidden costs of that particular project.

Mr. John Stuart Mill, a British philosopher and a civil servant was the first man to give the idea of Opportunity Cost in his economic theory of free markets as well as explaining his concept of liberty and an individual and freedom of choice.

Opportunity costs are thought of as the retrospective costs that cannot be recovered in the field of Economics and Corporate decision making. Opportunity costs are occasionally compared with “potential costs” which obviously are the future costs that may or may not incurr depending upon the decision taken. Both past aswell as prospective costs can be either static or dynamic Austrian school of thought pay attention to the concept of opportunity costs on both sides of the market links very deeply to the importance of finance and economic profit estimation in their model of the market...
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